On Jan 28, we downgraded specialty departmental store
) to Underperform due to weaker-than-expected holiday season
sales, which also forced the company to reduce its earnings
expectation for the fourth quarter and fiscal year 2012.
Why the Downgrade?
Kohl's performance during the holiday season was impacted by
unfavorable weather conditions and lower consumer confidence,
which forced Kohl's to give more than expected discounts to its
customers. This was reflected in Dec comparable store sales,
which were lower than the company's expectations. Notably, the
company's Nov sales were also below expectations.
The sluggish sales also prompted the company to slash its
expectations for the fourth quarter and fiscal year 2012. The
company has reduced its earnings expectation to a range of $1.60
to $1.62 for the fourth quarter and $4.11 to $4.13 for fiscal
2012 versus its previous guidance of $2.00 to $2.08 for the
fourth quarter and $4.52 to $4.60 for fiscal 2012.
Estimates for Kohl's have been declining ever since it
reported its Dec comparable sales. The Zacks Consensus Estimate
for fiscal 2012 has gone down 7.0% to $4.13 per share over the
last 30 days, while the Zacks Consensus Estimate for fiscal 2013
declined 6.1% to $4.58 per share over the same timeframe. With
the Zacks Consensus Estimates for both fiscal 2012 and 2013 going
down, the company now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
Other than weak holiday season, Kohl's has been facing the
burden of increasing cost of raw materials, especially cotton in
the last two years. Apart from cotton price hike, the company has
also been facing a 10 - 15% increase in other apparel costs.
Crop yields, weather conditions, transportation costs, energy
prices, work stoppages and government regulations mainly lead to
such cost escalations. In addition, any decrease in the
availability of raw materials increases its cost and thereby
lowers the sales volume of the company. Often this leads to
passing off the higher costs to customers.
In addition, Kohl's doesn't have access to the leading
accessories brands trending at other department stores, even
though it focuses on introducing new brands. Rather, new private
and exclusive brand introductions appear to be cannibalizing
Also, Kohl's absence of international exposure makes it
vulnerable to a weak U.S. economy and declining consumer spending
in the U.S. markets. Besides, Kohl's discounted pricing does not
allow it to overcome the tough economic times.
Stocks That Warrant a Look
While we prefer to avoid Kohl's until we see signs of
improvement in the company's performance, other retail stocks
worth a look are
Big Lots Inc.
Ross Stores Inc.
TJX Companies, Inc.
). All of them carry Zacks Rank #2 (Buy).
BIG LOTS INC (BIG): Free Stock Analysis
KOHLS CORP (KSS): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis
TJX COS INC NEW (TJX): Free Stock Analysis
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